The stock market has been staying below its 200-day moving average and forming lower tops and lower bottoms, confirming that it has tanked out
THE debate on whether we are in a bear market or not should be over, as it now feels and seems like a bear market, says brokerage house Morgan Stanley, in its India strategy report titled ‘How Long Will This Bear Market Last?’.
A key indicator has been the market staying below its 200-day moving average (DMA), and forming successive lower tops and lower bottoms.
In the three bear markets of the last 20 peak, Indian benchmarks have already fallen close to 40% from their record highs seen in January this year. But the moot question here, according to Morgan Stanley, is how long this bear phase will last, and not how much further prices are going to fall.
This bear market has averaged 1.3% in the 25 weeks that it has fallen since its January top—slightly higher than the average of 1.1% in the first 25 weeks of the previous three bear markets.
Morgan Stanley India economist is of the view that macro fundamentals could take 18 months to bottom out. Based on this, the bear market may have another 25-50 weeks to go, the Morgan Stanley report says, adding that the pace of fall in stock prices will decline going forward.
“The market will likely bounce back as it does in bear markets the triggers this time around could be a sanguine earnings season, benign action from the RBI and weak sentiment,” the report said. But the brokerage maintains that it will use the opportunity to book profits.
While market is betting on early elections, Morgan Stanley feels is unlikely to be the case. Even if elections take place ahead of schedule, it is unlikely to improve matters.
“Subsequent governments since the mid-90s have been broader coalitions causing the markets to sell off post elections,” the report said.
A fall in crude prices would be positive for a oil importer like India, but the reason for the softening of oil prices will be important.
“If it is led by a significant demand destruction, it may not be good news,” the Morgan Stanley report says.
The brokerage expects a delayed recovery in global risk appetite as Central Banks in developed economies are struggling to deal with slowing growth, rising inflation and fragile financial market confidence.
The report says that for the market to bottom out, retail investors have to panic, and there has to a wave of earnings downgrades.
“This is about the worst performance in more than a decade on a year-on-year basis. However, domestic households seem convinced that equities have to be bought and not sold,” says the report.
Views on oil, inflation, growth and currency (hence risk appetite) should ultimately be embedded in the long bond yield, feels Morgan Stanley.
“Eventually, long bond yields need to stop rising, or put another way, the market has to get confidence that the medium-term inflation rate is under control. On our residual income model, if the 10-year bond yields rise to 9.5% the Sensex fair value drops to 11380 (13% lower from here) signifying the importance of this indicator of macro fundamentals,” the report says.
The market is at fair value but may go below fair value before it bottoms out, the brokerage feels. Also the fair value itself could move down as earnings and bond yields move lower and higher respectively.
“Valuation and return dispersion need to narrow for the market to bottom out. For genuinely long-term investors, cash flows (dividends) are now available in several parts of the market at a reasonable price,” the report adds.
THE debate on whether we are in a bear market or not should be over, as it now feels and seems like a bear market, says brokerage house Morgan Stanley, in its India strategy report titled ‘How Long Will This Bear Market Last?’.
A key indicator has been the market staying below its 200-day moving average (DMA), and forming successive lower tops and lower bottoms.
In the three bear markets of the last 20 peak, Indian benchmarks have already fallen close to 40% from their record highs seen in January this year. But the moot question here, according to Morgan Stanley, is how long this bear phase will last, and not how much further prices are going to fall.
This bear market has averaged 1.3% in the 25 weeks that it has fallen since its January top—slightly higher than the average of 1.1% in the first 25 weeks of the previous three bear markets.
Morgan Stanley India economist is of the view that macro fundamentals could take 18 months to bottom out. Based on this, the bear market may have another 25-50 weeks to go, the Morgan Stanley report says, adding that the pace of fall in stock prices will decline going forward.
“The market will likely bounce back as it does in bear markets the triggers this time around could be a sanguine earnings season, benign action from the RBI and weak sentiment,” the report said. But the brokerage maintains that it will use the opportunity to book profits.
While market is betting on early elections, Morgan Stanley feels is unlikely to be the case. Even if elections take place ahead of schedule, it is unlikely to improve matters.
“Subsequent governments since the mid-90s have been broader coalitions causing the markets to sell off post elections,” the report said.
A fall in crude prices would be positive for a oil importer like India, but the reason for the softening of oil prices will be important.
“If it is led by a significant demand destruction, it may not be good news,” the Morgan Stanley report says.
The brokerage expects a delayed recovery in global risk appetite as Central Banks in developed economies are struggling to deal with slowing growth, rising inflation and fragile financial market confidence.
The report says that for the market to bottom out, retail investors have to panic, and there has to a wave of earnings downgrades.
“This is about the worst performance in more than a decade on a year-on-year basis. However, domestic households seem convinced that equities have to be bought and not sold,” says the report.
Views on oil, inflation, growth and currency (hence risk appetite) should ultimately be embedded in the long bond yield, feels Morgan Stanley.
“Eventually, long bond yields need to stop rising, or put another way, the market has to get confidence that the medium-term inflation rate is under control. On our residual income model, if the 10-year bond yields rise to 9.5% the Sensex fair value drops to 11380 (13% lower from here) signifying the importance of this indicator of macro fundamentals,” the report says.
The market is at fair value but may go below fair value before it bottoms out, the brokerage feels. Also the fair value itself could move down as earnings and bond yields move lower and higher respectively.
“Valuation and return dispersion need to narrow for the market to bottom out. For genuinely long-term investors, cash flows (dividends) are now available in several parts of the market at a reasonable price,” the report adds.
